Fighting rising house prices is akin to fighting gravity. Gravity will always return you back to earth. It’s just the velocity of that return that determines the resulting mess. Curbing property prices now will result in a rapid rise down the track.

There is one way to rapidly reduce house prices and that is to reduce the population. Reducing demand by having fewer people to buy New Zealand’s existing stock of houses would drive the price down. That isn’t going to happen for two reasons.

1. Governments will seek to increase our population:
If you want first world problems you need a growing first world economy and the majority of our economic growth has resulted from increasing the number of workers, ie the population.

2. Pressure from immigration will increase:
The world population is still growing. It took us humans 1000’s of years to hit 1 billion then another 123 years to hit 2 billion and a further 33 years for 3 billion. The last billion only took 12 years to amass. More humans, same amount of land.

Decreasing population demand is not going to happen so political parties are looking to supply side answers. Increase the number of houses available. How? By increasing the supply of available land and building more homes.

Here in lies the fallacy. Increasing the supply of houses automatically increases the demand for the inputs required to build those houses. Increasing the demand for inputs (Land, materials, tradespeople, professional services, health & safety, and infrastructure) drives the price up. As a result, affordable houses become less affordable.

The only way to counter this is to have a leap in productivity and efficiencies so it actually cost less to build a house now than what it did say a year ago. Keep doing this and property prices will drop. Not going to happen. Why?

Because we have earthquakes, councils and first world problems to deal with. As a result our buildings now need to meet more robust building standards. This costs a lot more. New subdivisions have to provide better load bearing capacity, better drainage, more robust services and a host of other factors. This costs even more.

Government may be lending money to councils to offset some of the infrastructure costs to stimulate land development but turning development cost into debt is just a mechanism to make something that isn’t viable, look viable. It’s a political Houdini act.

Accumulating debt to make something unviable viable is like piling on the weight of calories. It may taste good now, but there is no escaping the invisible hand of the Grim Reapers justice. He will come calling.

So property prices will keep rising. Central government may be able to soften the rise by deferring land development costs for now but when the pressure builds and the true cost is exposed new house prices will jump and second-hand house prices will follow in tandem.

As the pressure on the cost of supply intensifies, and the Reserve Bank reduces the LVR, well we might see some of those rises we saw between 2000 – 07.

This article has been republished with permission from Billy Lomax, Lomax Real Estate Ltd

The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans (NZHL).